Related Party Transactions

9 Months Ended

Sep. 30, 2012

Related Party Transactions [Abstract]

Related Party Transactions

Note 12 - Related Party Transactions

Michael Dodd

Mr. Dodd, who was a member of our board of directors from September 2010 until his resignation in August 2012, is currently serving as the Chief Executive Officer of 3D Global Solutions Inc. (3D).  3D provides professional program management services to governments, corporations and global organizations. During the year ended December 31, 2011, 3D purchased approximately $102,200 of our composite rail ties on terms similar to our other customers and which remains uncollected at September 30, 2012 and we have provided an allowance due to its prospect for collectability. We have initiated legal action in an effort to collect the balance due.

Samuel G. Rose

Samuel G. Rose beneficially owns in excess of 5% of our outstanding stock.

Convertible Revolving Credit Agreement. During the year ended December 31, 2011, we entered into a convertible revolving credit agreement (the Agreement”) with Mr. Rose. Under the terms of the Agreement, Mr. Rose had agreed to lend us up to $2,000,000 on a revolving basis (the Loan”). The Loan carried interest at 12% per annum on the outstanding principal amount. The Loan had an original maturity date of September 30, 2012. In consideration for the Loan, we paid all legal and accounting costs associated with the documentation of the Loan and issued to Mr. Rose 250,000 shares of our restricted common stock. We have agreed to register the common stock issued to Mr. Rose within six months from date of closing provided, however, if such common stock is not registered we will redeem all of Mr. Rose’s unregistered stock in cash at a price equal to the greater of (a) the average VWAP for the thirty days ending one trading day prior to the date of issuance or (b) $0.90 per share.

We gave Mr. Rose a security interest in our inventory and accounts receivable pursuant to terms of a security agreement. During the year ended December 31, 2011, we borrowed $466,000 under the Agreement. During the three months ended June 30, 2012 we repaid the outstanding principal and accrued interest and the Agreement was cancelled.

Demand Promissory Notes. Effective April 25, 2012, we entered into a Memorandum of Understanding (the “MOU”) with Mr. Rose and several other investors. Pursuant to the MOU, we issued to Mr. Rose a demand promissory note (the “Demand Note”) in the principal amount of $1,666,667.  Interest accrued on the unpaid principal balance of the Note at a rate of 8.00% per annum. The principal balance of the Note, together with accrued and unpaid interest, was due and payable at any time after June 30, 2012 on demand, and was cancelled when the balance was converted into our 8% convertible promissory note on August 24, 2012.

8% Convertible Promissory Notes. On August 24, 2012, we entered into a Note Purchase Agreement (the “Purchase Agreement”) with Mr. Rose, pursuant to which, we issued and sold to him an aggregate principal amount of $1,709,260 of our 8.0% convertible promissory notes (the “August Note”) which is initially convertible into shares of our common stock, no par value (the “Common Stock”), at a conversion price equal to $0.40 per share of Common Stock, subject to adjustment as provided on the terms of the August Note, and associated warrant (the “August Warrant”) to purchase, in the aggregate, 4,273,150 shares of Common Stock, subject to adjustment as provided on the terms of the August Warrant. In consideration for the issuance of the August Note and the August Warrant, Mr. Rose converted the aggregate principal amount outstanding, together with all accrued and unpaid interest, under our Demand Note.

On September 28, 2012, pursuant to the Purchase Agreement, we issued and sold to Mr. Rose an aggregate principal amount of $500,000 of our Note (the “September Note”) which is initially convertible into shares of our Common Stock, at a conversion price equal to $0.40 per share of Common Stock, subject to adjustment as provided on the terms of the September Note, and associated warrant (the “September Warrant”) to purchase, in the aggregate, 1,250,000 shares of Common Stock, subject to adjustment as provided on the terms of the September Warrant. In consideration for the issuance of the September Note and the September Warrant, Mr. Rose paid us cash in the aggregate amount of $500,000.

The August Note and September Note (together, the “Notes”), including all outstanding principal and accrued and unpaid interest, are due and payable on the earlier of five years from date of issuance or upon the occurrence of an Event of Default (as defined in the Notes). We may prepay the Notes, in whole or in part, upon 60 calendar days prior written notice to the holders thereof. Interest accrues on the Notes at a rate of 8.0% per annum, payable during the first three years that the Notes are outstanding in shares of Common Stock, valued at the weighted average price of a share of Common Stock for the twenty consecutive trading days prior to the interest payment date, pursuant to the terms of the Notes. During the fourth and fifth years that the Notes are outstanding, interest that accrues under the Notes shall be payable in cash.

The August Warrant and September Warrant (together, the “Warrants”) are exercisable at an exercise price of $0.60 per share of Common Stock, subject to adjustment as provided for by the terms thereof, for a period commencing on the date of issuance and ending on the earlier to occur of the date that is (i) three years after the date upon which the weighted average price of a share of Common Stock for the 90 consecutive trading days prior to such date is at least $2.00 per share, and (ii) five years after the date on which the Note to which the applicable Warrant is related has been repaid in full.

In connection with the entry into the Purchase Agreement, pursuant to the terms thereof, on August 24, 2012, (i) we granted to Mr. Rose certain demand and piggyback registration rights with respect to the registration of certain Company securities under the Securities Act and the rules and regulations promulgated thereunder, and (ii) we granted a security interest and lien in all of our assets and rights to Mr. Rose to secure our obligations under the Notes.

Melvin Lenkin

Melvin Lenkin beneficially owns in excess of 5% of our outstanding stock.

Demand Promissory Notes. Effective April 25, 2012, we entered into a Memorandum of Understanding (the “MOU”) with Mr. Lenkin and several other investors. Pursuant to the MOU, we issued to Mr. Lenkin a demand promissory note (the “Demand Note”) in the principal amount of $1,426,667.  Interest accrued on the unpaid principal balance of the Note at a rate of 8.00% per annum. The principal balance of the Demand Note, together with accrued and unpaid interest, was due and payable at any time after June 30, 2012 on demand, and was cancelled when the balance was converted into our 8% convertible promissory note on August 24, 2012.

8% Convertible Promissory Notes. On August 24, 2012, we entered into a Note Purchase Agreement (the “Purchase Agreement”) with Mr. Lenkin, pursuant to which, we issued and sold to him an aggregate principal amount of $1,463,443 of our 8.0% convertible promissory notes (the “August Note”) which is initially convertible into shares of our common stock, no par value (the “Common Stock”), at a conversion price equal to $0.40 per share of Common Stock, subject to adjustment as provided on the terms of the August Note, and associated warrant (the “August Warrant”) to purchase, in the aggregate, 3,658,609 shares of Common Stock, subject to adjustment as provided on the terms of the August Warrant. In consideration for the issuance of the August Note and the August Warrant, Mr. Lenkin converted the aggregate principal amount outstanding, together with all accrued and unpaid interest, under our Demand Note.

On September 28, 2012, pursuant to the Purchase Agreement, we issued and sold to Mr. Lenkin an aggregate principal amount of $637,000 of our Note (the “September Note”) which is initially convertible into shares of our Common Stock, at a conversion price equal to $0.40 per share of Common Stock, subject to adjustment as provided on the terms of the September Note, and associated warrant (the “September Warrant”) to purchase, in the aggregate, 1,592,500 shares of Common Stock, subject to adjustment as provided on the terms of the September Warrant. In consideration for the issuance of the September Note and the September Warrant, Mr. Lenkin paid us cash in the aggregate amount of $637,000.

The August Note and September Note (together, the “Notes”), including all outstanding principal and accrued and unpaid interest, are due and payable on the earlier of five years from date of issuance or upon the occurrence of an Event of Default (as defined in the Notes). We may prepay the Notes, in whole or in part, upon 60 calendar days prior written notice to the holders thereof. Interest accrues on the Notes at a rate of 8.0% per annum, payable during the first three years that the Notes are outstanding in shares of Common Stock, valued at the weighted average price of a share of Common Stock for the twenty consecutive trading days prior to the interest payment date, pursuant to the terms of the Notes. During the fourth and fifth years that the Notes are outstanding, interest that accrues under the Notes shall be payable in cash.

The August Warrant and September Warrant (together, the “Warrants”) are exercisable at an exercise price of $0.60 per share of Common Stock, subject to adjustment as provided for by the terms thereof, for a period commencing on the date of issuance and ending on the earlier to occur of the date that is (i) three years after the date upon which the weighted average price of a share of Common Stock for the 90 consecutive trading days prior to such date is at least $2.00 per share, and (ii) five years after the date on which the Note to which the applicable Warrant is related has been repaid in full.

In connection with the entry into the Purchase Agreement, pursuant to the terms thereof, on August 24, 2012, (i) we granted to Mr. Lenkin certain demand and piggyback registration rights with respect to the registration of certain Company securities under the Securities Act and the rules and regulations promulgated thereunder, and (ii) we granted a security interest and lien in all of our assets and rights to Mr. Lenkin to secure our obligations under the Notes.

Allen Kronstadt

Allen Kronstadt beneficially owns in excess of 5% of our outstanding stock, and was appointed to our board of directors on September 11, 2012 pursuant to the terms of our Note Purchase Agreement (the “Purchase Agreement”) entered into on August 24, 2012.

Demand Promissory Notes. Effective April 25, 2012, we entered into a Memorandum of Understanding (the “MOU”) with Mr. Kronstadt and several other investors. Pursuant to the MOU, we issued to Mr. Kronstadt a demand promissory note (the “Demand Note”) in the principal amount of $1,666,667.  Interest accrued on the unpaid principal balance of the Note at a rate of 8.00% per annum. The principal balance of the Demand Note, together with accrued and unpaid interest, was due and payable at any time after June 30, 2012 on demand, and was cancelled when the balance was converted into our 8% convertible promissory note on August 24, 2012.

8% Convertible Promissory Notes. On August 24, 2012, pursuant to the Purchase Agreement, we issued and sold to Mr. Kronstadt an aggregate principal amount of $1,709,630 of our 8.0% convertible promissory notes (the “August Note”) which is initially convertible into shares of our common stock, no par value (the “Common Stock”), at a conversion price equal to $0.40 per share of Common Stock, subject to adjustment as provided on the terms of the August Note, and associated warrant (the “August Warrant”) to purchase, in the aggregate, 4,274,075 shares of Common Stock, subject to adjustment as provided on the terms of the August Warrant. In consideration for the issuance of the August Note and the August Warrant, Mr. Kronstadt converted the aggregate principal amount outstanding, together with all accrued and unpaid interest, under our Demand Note.

On September 28, 2012, pursuant to the Purchase Agreement, we issued and sold to Mr. Kronstadt an aggregate principal amount of $333,000 of our Note (the “September Note”) which is initially convertible into shares of our Common Stock, at a conversion price equal to $0.40 per share of Common Stock, subject to adjustment as provided on the terms of the September Note, and associated warrant (the “September Warrant”) to purchase, in the aggregate, 832,500 shares of Common Stock, subject to adjustment as provided on the terms of the September Warrant. In consideration for the issuance of the September Note and the September Warrant, Mr. Kronstadt paid us cash in the aggregate amount of $333,000.

The August Note and September Note (together, the “Notes”), including all outstanding principal and accrued and unpaid interest, are due and payable on the earlier of five years from date of issuance or upon the occurrence of an Event of Default (as defined in the Notes). We may prepay the Notes, in whole or in part, upon 60 calendar days prior written notice to the holders thereof. Interest accrues on the Notes at a rate of 8.0% per annum, payable during the first three years that the Notes are outstanding in shares of Common Stock, valued at the weighted average price of a share of Common Stock for the twenty consecutive trading days prior to the interest payment date, pursuant to the terms of the Notes. During the fourth and fifth years that the Notes are outstanding, interest that accrues under the Notes shall be payable in cash.

The August Warrant and September Warrant (together, the “Warrants”) are exercisable at an exercise price of $0.60 per share of Common Stock, subject to adjustment as provided for by the terms thereof, for a period commencing on the date of issuance and ending on the earlier to occur of the date that is (i) three years after the date upon which the weighted average price of a share of Common Stock for the 90 consecutive trading days prior to such date is at least $2.00 per share, and (ii) five years after the date on which the Note to which the applicable Warrant is related has been repaid in full.

In connection with the entry into the Purchase Agreement, pursuant to the terms thereof, on August 24, 2012, (i) we granted to Mr. Kronstadt certain demand and piggyback registration rights with respect to the registration of certain Company securities under the Securities Act and the rules and regulations promulgated thereunder, and (ii) we granted a security interest and lien in all of our assets and rights to Mr. Kronstadt to secure our obligations under the Notes.